Ruminations of an Israeli-American Venture Capitalist Looking for the Best and Brightest Entrepreneurs

Monday, October 29, 2012

The Other Side of Innovation

-->

The proverbial “billion dollar company” seems out of reach
for many Israeli start-ups, but may just require a different way of thinking
about innovation and scaling. I learn a lot of Israeli start-ups and venture
investing by observing my American colleagues and of course by studying
successful American start-ups, whether or not they are in the BVP portfolio.
While many American start-up ideas, particularly in the SaaS and Internet
domains, could never have been started and properly executed from Israel,
occasionally I come across a company that should have been founded in
Israel.

One such example is Ubiquiti Networks (UBNT), founded in
2005 in the apartment of a 26 year-old wireless engineer from Apple, Robert
Pera. Ubiquiti has no Israeli connection, but it offers some fantastic lessons
for the Israeli entrepreneurial community because of their domain and
go-to-market strategy. Ubiquiti operates in fixed wireless broadband, arguably
one of least sexy market segments today due to cut throat competition and
struggling customers (but one familiar to many Israelis).

To start off, Ubiquiti didn’t aim to provide the best
wireless product, but to create a wireless product that would allow wireless
ISPs (WISPs) to better compete with wireline
competitors. Ubiquiti realized that its customers’ businesses were failing
precisely because existing wireless gear and was too expensive (product cost
including costs of service, customization, support, etc.). And so Ubiquiti set
out to take over a billion-dollar market by solving this key issue of cost
essentially throwing a lifeline to the vanishing WISP.

Ubiquiti’s disruption to the market came from the fact that
it was to sell its wireless ‘kit’ for less than 1/10th the
competition without a significant tradeoff in quality and performance. They
were able to do this with a unique development and business development model
that lowered their own cost structure, which they then passed on to the
customer. This not only includes the cost of goods sold, but cost of
manufacturing, marketing, selling and supporting that product.

Ubiquiti didn’t hire any salespeople and directed everyone
to their website and where they could easily find local distributors around the
globe. Ubiquiti didn’t have a support organization, and instead directed all
customers to a detailed online forum which now has 334K posts from 142K
members! It helps when your customers don’t really compete with one another and
will gladly help, advise and recommend products to one other. And because the
product was so cheap and the customers themselves installed and maintained it,
there was no need to sell or charge for expensive warranties.

Eliminating most SG&A costs from their model was a
radical approach for a telecom equipment company like Ubiquiti, but one that
fit very well with their WISP customer base, where the cost of base station and
CPE equipment determined whether they had a viable business model or not. The
resulting hyper efficient sales model is far more innovative and sustainable
than the typical technology advantage that a start-up introduces to the world.
That’s not to say there is little technology in their products, because there
is. They relied on software to innovate, preferring to ride the downward cost
curve of hardware commoditization. Even Chinese vendors have a hard time
innovating price reduction like this and several companies had to resort
to theft to compete.

Since it’s founding, Ubiquiti has generated over $100M in
profits and will soon pass $100M in quarterly revenues. For a communications
equipment company to grow this quickly, while maintaining operating margins of
35% is remarkable.

Moreover, Ubiquiti never raised external money until it
raised a $100M private round in 2010. Ubiquiti has since moved into adjacent
markets, like enterprise WLAN, surveillance camera, microwave and routers with
a similar approach of bargain prices and customer self reliance. So expect more
disruption from these guys, and new competition for several Israeli wireless
leaders.

To put this story in some perspective for the Israeli
audience, in 2005, Israel-based Alvarion was a market leader in fixed broadband
wireless and approached a billion dollar market cap.A mere seven years later, it is Ubiquiti with
the billion dollar market cap; and Alvarion is worth $25M, slightly less than
its cash position. As for other wireless equipment players, Nokia Siemens
Networks is falling apart, Motorola has been gutted, and you can buy both Proxim
and Airspan in a package deal for $1M.

Ubiquiti proves that fantastic outcomes
can emerge from any sector, and that technology is not the only source
innovation. Ubiquiti might be a wireless equipment company, but its
thoughtful strategy provides lessons for all technology companies:

1.There is NO long term advantage in technology
innovation that doesn’t result in a superior business model

2.Embrace the weakness of your competition, by
leveraging hardware commoditization and reducing if not eliminating the need
for expensive post-sales operations and support

3.Listening to your customers is more important
than talking to them. Leverage the Internet for marketing, sales, support and
customer feedback (product definition).

Although Ubiquiti was not a BVP portfolio company, it represents
the kind of innovative, software centric telecom we are fond of. BVP has
invested in four telecom companies over the past few years, each one attempting
to best its competition with a software technology that supports a superior and more
capital efficient business model, including Axis Network Technology (acquired
by Ace Technology), Traffix Systems
(acquired by F5 Networks), Intucell Systems and Vasona Networks. I look forward to finding and funding the Israeli Ubiquiti in the years to come.

3 comments:

I found your blog via the Geektime 100 list while hunting for investment into an Israeli project, and I am glad I did! I am writing in to ask whether you would be interested in evaluating Runcom Communications Ltd. as an investment opportunity. Runcom operates in the same space as Ubiquiti (Fixed Wireless) and its new TV White Space solution presents tremendous opportunity in the market. Over the past year I have been writing, e-mailing, visiting in person, and on the phone with approximately 1,200 WISPs in the USA and listening to their requirements, while learning about their lives and their business. I believe that TV White Space is interesting to them because it enables growth of their business in reaching Non line of sight customers in a technical manner that is superior to 900Mhz (less interference, better signal due to bigger size of wave at lower frequency). However, Runcom's current product is built on WIMAX and developing it into LTE to meet the speed requirements of the WISPs' end users requires capital financing. Could you e-mail me at zacharyburt@gmail.com for discussion? Zachary Burt

Bessemer Blogs

StatCounter

Update Your Followers About My Blog

The thoughts and opinions expressed herein belong to the author and do not necessarily reflect those of Bessemer Venture Partners or any of its affiliates (“Bessemer”). The material here is written on the author’s own time for [his/her] own reasons and Bessemer has not reviewed or approved the information herein. Any discussion of topics related to Bessemer or its investment activities should not be construed as an official comment of Bessemer.